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This week is almost the half-way point through the 90-day process Presidents Trump and Xi agreed to in Buenos Aires. Mid-level US officials from Washington are in Beijing for the first time since Argentina, to make progress on the agenda for when senior Chinese officials head to Washington later this month to meet US counterparts. China specialists Rhodium Group have put together a useful note that describes the elements they think will, and will not, be in a deal if one can be fashioned. The note breaks these into the following areas where the US is seeking two sets of commitments (and two sets of conditions, safeguards and verification).

The first commitment is for China to buy US products to reduce the trade imbalance an the second is on structural reform, which means permanently China changing impediments to fair competition that arise from state controls over resource allocation, subsidies, industrial policies that alter commercial outcomes and other interventions. This piece provides some educated guesses on the elements of a potential deal, and suggest the negotiators this week will only make broad comments on progress, not announce any detail. The problem with that is that it will be hard to tell whether we are on track to resolving a Trade War, says Rhodium, and with just 7 weeks to go, that doesn’t leave much time to sort out the real detail and hard issues, which is where all the real dealmaking happens. There is always the possibility that the leaders will “stop the clock” or extend the negotiating period at the last minute, says Rhodium, that probability has probably increased following the US equity market turmoil of the previous month.

Funding pressures in China are on the rise, with and 12-month forward points climbing to fresh August highs yesterday as onshore liquidity tightens. The 7-day repo traded at 2.4988%, the highest since February, while overnight repo traded at 2.0621%, the highest since April 25. Logan Wright and Lauren Gloudeman from Rhodium Group published this timely piece yesterday on this market. They suggest recent pressures are possibly the result of Chinese authorities starting to deliver on threats to tighten liquidity to limit risks from some of the leveraged positions among non-bank financial institutions. The problem with such a strategy is that stability in China’s money markets depends upon market perceptions of implicit PBOC commitments to maintain low and stable short-term rates. As a result, policy-related risks are highly asymmetric, say Rhodium, and could be consequential for asset markets boosted by the leveraged borrowing of non-bank financial institution. For the full note, click below to request access from Rhodium directly. They are happy to provide complimentary access on a case-by-case basis.

The surprise increase in the value of China’s foreign exchange reserves may well underline that pressure on the currency has eased significantly, for now at least. So, the question of whether Chinese authorities might impose capital controls is still a moot point. Moreover, as Logan Wright from Rhodium Group points out, China’s households and corporates want to diversify into foreign assets, and that means balance of payments strains if these flows are one-way. Stringent capital controls are a temptation in pursuit of medium-term currency stability. Wright and his co-authors, Thilo Hanemann and Lauren Gloudeman attempt to shed some light on some of the contradictions that exist between financial regulators, such as SAFE on one hand who argue against such measures, and on the other, the various anecdotal reports that suggest there may be an unofficial clampdown taking place to block capital outflows. If you would like the to access the full report, click below to request it directly from Rhodium.